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TheDeal: Loeb Treads Close to the SEC's Line

NEW YORK ( TheStreet) -- Did activist investor Dan Loeb circumvent the Securities and Exchange Commission last week to make an even bigger splash in The New York Times?

It might appear that way considering news of his 6.5% stake in Sony (SNE - Get Report) -- not to mention his hand-delivered letter to same calling for a separate public listing of Sony Entertainment -- first appeared in the Times with a dateline of May 14, 2:15 a.m.

Call it a scoop, call it a drop, but whatever it was, it was also market-moving. Sony's American Depositary Receipts, which trade on the New York Stock Exchange, were up 14% when the market opened later the same day at 9:30 a.m.

Much money could have been made in the seven hours and 15 minutes between the Times' dateline and the market's opening. Moreover, given the trifecta of an underperforming stock, underappreciated assets and a take-no-prisoners hedgie who appears from nowhere to rattle Sony's cage, the stock's uptick was a cinch to call.

What might have been a problem for Loeb's New York hedge fund, Third Point LLC, is that it didn't call it -- not to the SEC at least. And, as of this writing, it still hasn't.

However, on delving into disclosure legalities, one discovers a fine line between ownership and exposure. The former is self-evident; the latter can include ownership but also encompasses synthetic interests through swaps or options.

Those synthetic interests gave Loeb just the wiggle room he needed to stay legal. After all, in his actual letter to Sony president and CEO Kazuo Hirai, he characterized Third Point as Sony's largest shareholder "with exposure to approximately 64 million shares." He even broke down his investment as $700 million of direct ownership and $440 million of cash-settled swaps.

Had it all been ownership, of course, Loeb would have had a reporting obligation. He'd already be late in fulfilling it, too, inasmuch as Sony's stock is registered under Section 12.

That means a shareholder who owns more than 5% is required to file a report on Form 13D, if an active investor, or a Form 13G, if a passive investor. He's also required to file it within 10 days of crossing the ownership threshold of 5%.

Still, for a night's work, Loeb didn't do badly. The 14% rise in Sony's stock price triggered by the Times going public with his designs on the company gave his exposure a paper profit of $160 million when the market opened that very morning. And that's almost to the penny what Loeb's aider and abettor, New York Times Co., recorded for income from continuing operations, net of income taxes, for all of last year.

-- Written by Richard Morgan in New York City

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